You can repeat this exercise with R instead of M to get the realistic model.

I like to make some guess as to how fast a business can get to that max so that I know the rev per year and what not. Yes, this is a trivial calculation but I think it’s a really useful rule of thumb formula for sizing up an opportunity in software and media.

The key to this equation is estimated M accurately (usually means being very honest with your market). It’s not too tough with todays tools and open data to get a good look at demographics, buying histories, competitors and so forth.

Note that I make no attempt to account for market valuations and all that. That way of thinking is usually a chasing after the wind.

Why does this equation help?

Well, the main point is that it gives me a great sense of scope. Many of the media properties and software products out there cost a ton of money and have mediocre maximum markets or very low lifetime value. Many businesses are eager to create a killer app but don’t have a grasp of what the scope of a killer app really has to be and/or they grossly underestimate how hard it is to make something.

What I find with this equation is that there’s a sweet spot in media and software. If you optimize this equation you find that you can’t make software or media that’s too esoteric or complicated to make nor can you make complete fluff. If you want to make something that appeals to everyone on the planet (not possible) it’s going to cost a lot and the cost to acquire users will be very high… so with this simple equation you learn you’ll be at it for a long time. On the other hand if you want to make a high end product for a niche, you’ll find that the overall opportunity might not be that big.